Oil: Further upside looks limited

[rooster59]

Oil: Further upside looks limited

By SPECIAL TO THE NATION

 

Mriganka Jaipuriyah, Associate Editorial Director, Asia

 

GLOBAL oil prices rose to their highest levels in three-and-a-half years in the aftermath of US President Donald Trump’s announcement that the US will pull out of the Iran nuclear deal. Further upside, however, looks limited.

 

Trump’s decision spooked the market, even though it was widely anticipated, because it comes at a time when the oil supply-demand balance is tightening.

 

Prices have been rising steadily since the start of 2018. The front-month ICE Brent crude futures contract has risen 18 per cent and is now firmly perched above the $77/barrel mark, and NYMEX crude futures has risen by 19 per cent to above $71/b. 

 

OECD commercial oil stocks that have been declining are now just 30 million barrels above their five-year average, according to the International Energy Agency. Stocks fell by 25.6 million barrels month on month in February to 2.84 billion barrels - the lowest level since April 2015, IEA said in its April monthly oil market report.

Add to this mix a pick-up in seasonal refinery activity over the May-August peak summer demand season and stocks are set to decline further.

 

Venezuela is another significant supply risk facing the market.

 

Venezuelan output, already in freefall, could be hit further if the US institutes sanctions in response to Venezuela’s upcoming May 20 presidential election that it has criticised as fraudulent.

 

Venezuela’s production of 1.41 million b/d in April was an 80,000 b/d fall from March and a 540,000 b/d plunge from its year-ago level, an S&P Global Platts survey showed.

 

According to sources in Venezuela’s oil ministry, the country is bracing for another 200,000 b/d drop by December, but some analysts expect a far greater decline.

 

Global oil demand, meanwhile, rose 1.9 million b/d in Q1 2018 compared with the same period the previous year, according to the US Energy Information Administration.

 

So, what does the US pulling out of the January 2016 Joint Comprehensive Plan of Action that was painstakingly negotiated by his predecessor really mean for oil supply?

 

Clarity has yet to emerge on the type of sanctions that will be imposed and the mode of implementation. Views are currently mixed and range from an immediate supply disruption of 200,000 b/d to 500,000 b/d in six months and up to 1 million b/d in one year.

 

Whatever the disruption, it is important to bear in mind that Opec and its non-Opec partners have 1.8 million b/d of production that they have deliberately turned off to support prices. This could gradually be brought back on stream to make up for any supply disruption.

 

Opec has also gone all out to reassure the market that it will do whatever is needed to maintain market stability.

 

Saudi Arabia is in “close contact” with Russia, the US and the UAE, which holds the rotating Opec presidency this year, “and will be connecting with other producers and major consumers over the next few days to ensure market stability,” Saudi energy minister Khalid al-Falih assured the market on May 9.

 

Saudi Arabia, Opec’s largest producer by far, holds some 2.18 million b/d of spare capacity, the IEA estimates. Other Opec members holding spare capacity according to the IEA include the UAE (310,000 b/d), Iraq (310,000 b/d) and Kuwait (240,000 b/d). In all, the IEA estimates that Opec has some 3.41 million b/d in spare capacity, defined as production that can be tapped within 90 days “and sustained for an extended period.”

 

US oil production, meanwhile, is raging on. The US EIA in its latest Short Term Energy Outlook released earlier this month said it expects US crude oil production to rise to 12 million b/d by November 2019. The EIA prediction would mean a staggering 2.65 million b/d increase from the 2017 average.

 

Closer to home, among Iran’s top Asian oil buyers, the Japanese and the South Koreans are expected to reduce their imports from the Persian Gulf producer. This is expected to benefit Chinese state-owned refiners, who could find themselves in a favorable position to buy abundant supply of Iranian crude oil at attractive prices

 

South Korea and Japan, two of the closest allies to the US in East Asia, would be keen to abide by the Trump administration's foreign policies as they require US support and influence in their quest to completely denuclearize North Korea and improve diplomatic and economic ties with Pyongyang this year.

 

In addition, the two giant Asian oil consumers were well positioned to adhere to sanctions that have been re-imposed by the Trump administration as they are more than capable of diversifying crude supply sources.

 

The US often struggles to influence China's trade relationship with Iran and Asia's biggest energy consumer may not hesitate to take advantage of the demand gap left by South Korea and Japan.

 

In the last seven years, China's crude imports from Iran have remained relatively stable in the 431,000-627,000 b/d range, data from the General Administration of Customs showed. In Q1, China's imports of Iranian crude rose 17.3% year on year to 658,000 b/d, making Iran the sixth-biggest supplier.

 

MRIGANKA JAIPURIYAR is Associate Editorial Director, Asia & Middle East Energy News & Analysis, S&P Global Platts

 

Source: http://www.nationmultimedia.com/detail/Economy/30345733

 

 

-- © Copyright The Nation 2018-05-19

[Cadbury]

35 minutes ago, rooster59 said:

Venezuelan output, already in freefall, could be hit further if the US institutes sanctions in response to Venezuela’s upcoming May 20 presidential election that it has criticised as fraudulent.

An interesting comment. I wonder if the US is similarly observant about the coming election in Thailand?

[NanLaew]

46 minutes ago, Cadbury said:

An interesting comment. I wonder if the US is similarly observant about the coming election in Thailand?

It is a good summation of the global oil and gas market.

 

In the context of a major oil producing country, a key supplier to the US market with ownership of a significant swathe of refineries on the US mainland that may be sold to the Russians to settle huge debts and currently ruled by a dictatorial regime that has for years been a thorn in their side, I would say observant but probably not so concerned.

[mikebell]

58 minutes ago, Cadbury said:

An interesting comment. I wonder if the US is similarly observant about the coming election in Thailand?

Thailand has no oil and an election is so far into the future that the US cannot imagine it will take place - ever.

[BEVUP]

It just amazes me that any excuse they can find will be used to increase oil prices.

 

Now if one was to fire a sh*#t load of Heat seekers or Guided missiles strategically, then that might be a different question

[Cadbury]

3 hours ago, mikebell said:

Thailand has no oil and an election is so far into the future that the US cannot imagine it will take place - ever.

I am not referring so much to the oil. I am talking more about the election. I  believe the US does recognise the election will take place. The question should arise in their minds as to whether it is fraudulent or otherwise? We, and many others, know the Thai election is showing signs of being a sham, but does the US know that? They should; they are keeping close diplomatic tabs on Venezuela as per the story: So why not Thailand? Maybe sanctions will come in due course.

 

"......if the US institutes sanctions in response to Venezuela’s upcoming May 20 presidential election that it has criticised as fraudulent".

[wirat69]

More than 20% increase at the pump in the past year, and rising!!!

[Srikcir]

1 hour ago, Cadbury said:

The question should arise in their minds as to whether it is fraudulent or otherwise?

Rather than the US, it's whether POTUS Trump feels it's fraudulent or otherwise. As he says, "I am the only one that matters." https://www.npr.org/sections/thetwo-way/2017/11/03/561797675/im-the-only-one-that-matters-trump-says-of-state-dept-job-vacancies

With Trump's penchant for authoritarian regimes in Asia (vs Western Hemisphere-go figure), he might be completely unruffled by a flawed or manipulated Thai election that results in Prayut again as PM.

Describing Prayut's visit to the White House in October 2017 as a "great honor," Trump offered a symbolic show of unity with the man behind a 2014 takeover that resulted in Washington cutting aid and cooling relations. http://www.nationmultimedia.com/detail/breakingnews/30328315

I could, therefore, see that despite positions from US intelligence agencies and State Department, Prayut's election to PM might be viewed by Trump as a great "congratulations!"  Just as he did with Putin.

[Srikcir]

7 hours ago, rooster59 said:

GLOBAL oil prices rose to their highest levels in three-and-a-half years in the aftermath of US President Donald Trump’s announcement that the US will pull out of the Iran nuclear deal.

Thailand will be hurt by this.

One of its major exports is refined oil products whose primary cost is oil. Inexpensive refinery and labor costs are the only factors that make that export competitive. Substantial increase in cost of oil will likely cost Thai profit margins and making export of refined oil products a lost leader.

In turn more of the product might be diverted into the Thai domestic market but only to create further price depression.

[Cadbury]

55 minutes ago, Srikcir said:

Rather than the US, it's whether POTUS Trump feels it's fraudulent or otherwise. As he says, "I am the only one that matters." https://www.npr.org/sections/thetwo-way/2017/11/03/561797675/im-the-only-one-that-matters-trump-says-of-state-dept-job-vacancies

With Trump's penchant for authoritarian regimes in Asia (vs Western Hemisphere-go figure), he might be completely unruffled by a flawed or manipulated Thai election that results in Prayut again as PM.

Describing Prayut's visit to the White House in October 2017 as a "great honor," Trump offered a symbolic show of unity with the man behind a 2014 takeover that resulted in Washington cutting aid and cooling relations. http://www.nationmultimedia.com/detail/breakingnews/30328315

I could, therefore, see that despite positions from US intelligence agencies and State Department, Prayut's election to PM might be viewed by Trump as a great "congratulations!"  Just as he did with Putin.

I think your first two lines sums it up. It is how POTUS judges Prayut. I think his 2017 comments before "great honour" were just said for reasons of civility. The big "congratulations" for Putin was intended for more important diplomatic reasons.

But now is now and the electoral skulduggery that has been going on since 2017 along with the crippling of other parties is there for US intelligence and everyone else to see. I still believe POTUS doesn't like cheats whether Asian or not. He certainly doesn't like the Venezuelan President Nicolas Maduro and he has him figured as a cheat. Incidentally Venezuela's main opposition coalition is boycotting the coming poll, saying it is a farce intended to legitimize a "dictatorship." President Maduro has even barred some opposition parties from standing. Que!

[Watchful]

9 hours ago, Srikcir said:

Thailand will be hurt by this.

One of its major exports is refined oil products whose primary cost is oil. Inexpensive refinery and labor costs are the only factors that make that export competitive. Substantial increase in cost of oil will likely cost Thai profit margins and making export of refined oil products a lost leader.

In turn more of the product might be diverted into the Thai domestic market but only to create further price depression.

Wait a minute there! Yes, rising oil crude prices will impact Thailand's refineries, but it impacts their competitor's costs as well.

 

Indeed, higher crude prices usually favorably impacts the refiners.  Of course, that only works if those rising prices effect everyone equally.

 

If China, for example, were to continue to source Iranian crude, but at a reduced price (having a stockpile and few customers, puts Iran in a weak pricing position), this could put the Thailand refineries in a tough spot.